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AUDIT STANDARDS & CURRENCY GAMES

Audit standards under scrutiny The Financial Reporting Council’s Audit Quality Inspection unit reports repeatedly of lapsed standards in each of the largest firms. Recent conclusions refer to “misleading references in tender documents”; “breaches of ethical standards”; “lack of oversight”; “need to improve audit procedures”, and the like. The size of global corporations expands exponentially, while there are only four firms with the reach to tackle audits of that scale and complexity. They are locked, competitively, at each other’s throats, and it is no wonder that audits keep switching from one to another in a commercial survival game. This is a veritable breeding ground for the most obvious conflict: straying too close to a management more interested in getting your stamp of approval than the objectivity of your scrutiny. If auditors’ standards decline to the point of reflecting the moral calibre of those whose accounts they check, the profession is unwittingly heading for redundancy in its present form. There is now talk of discontinuing FRC inspections – obviously some would prefer to have criticisms stifled rather than confront the risk of having failures exposed. Casino currency – the endgame? Let’s talk about money. Imagine that the currency your government has adopted is one over which it has absolutely no control. Will it trust remote, unelected, technocrats, who do control it, not to lend capriciously against worthless collateral? On projects that, even on a cursory evaluation, will never return a profit? Can unprincipled functionaries be trusted to preserve its purchasing power? For how long would you expect such a currency to survive? As I write, the Greek tragedy now on stage is convulsed in political wrangling, with an imminent referendum carrying existential implications. Since potential consequences are pure speculation, we can at least ask how this crisis became inevitable. When the financial tsunami of 2008 struck, the Queen famously asked: “if this thing is so big, why did no one see it coming?” Well, in today’s case, many did see it coming and shouted warnings – but the closer it came, the greater became politicians’ propensity for deafness. Greece’s creditors, the IMF, EC and ECB, tried to wring concessions that might have achieved yet another illusory bailout. I say “illusory” because the ECB lifeline, “emergency liquidity assistance” (ELA), is nothing but a conjuring trick. Follow this: the ELA lends money to insolvent Greek banks via the Bank of Greece against collateral of freshly minted bonds. The banks pass this money to the government, which then uses most of it to pay interest on existing debt, as well as wages and pensions to public sector workers. As an exercise in financial futility, this charade takes some beating. The Greek government was desperate for a few billion more euros from the IMF and ECB in order to pay its maturing debts to, yes, the IMF and ECB. Doesn’t it normally tell you something important about those who owe you money when you have to lend them more so that they can meet their next repayment? Ninety per cent of Greece’s earlier bailout funds went straight to financial institutions rather than into its real economy – a huge dose of quantitative easing in effect. A third bailout would do the same: repay those lenders still more of the fiat-junk they generate on tap. A deeper fault-line Dependency, whether of individuals or nations, always descends into entitlement. There will always be one nation whose economy lags behind the others. An arrangement whereby taxpayers in 17 other countries are obliged to subsidise the unconstrained profligacy of one laggard’s bloated state sector can become an alluring entitlement. No wonder the majority of Greeks still want to retain the euro, even after the music has stopped. Just to add a further dose of misery to the mix. Much has been written about the risk of contagion. Well, here’s the real contagion: the ECB’s share of Greek debts, that will never be repaid, is double the ECB’s own equity and reserves. It is in dire straits and will soon have to make a cash-call from eurozone members, at least half-a-dozen of which teeter on the brink of bankruptcy themselves. _____________________________________________________________________________